During European trading on Monday, spot gold (XAU/USD) edged higher for a second consecutive session, trading near the $4,400 mark, though it remained below the highs hit on Thursday, which were the strongest since June 5.

US retail sales unexpectedly fell 0.6% in July, marking the first decline in nine months and the steepest monthly drop since May of last year. This was compounded by the University of Michigan's consumer sentiment index dropping from 55.2 to 51, further weakening market expectations for a Federal Reserve interest rate hike. The resulting pressure on the US dollar provided support for the non-yielding gold asset.

However, ongoing geopolitical risks—including the US preparing to impose "unprecedented" economic sanctions on Iran, the unresolved standoff in the Strait of Hormuz, and continued Ukrainian attacks on Russian refineries—have generated safe-haven demand for the dollar, capping gold's upside potential.

Broad-based US economic data weakness puts pressure on the dollar, supporting gold

The US Census Bureau reported on Friday that retail sales fell 0.6% month-on-month in July, the first decline in nine months and the largest monthly drop since May last year, significantly missing the market consensus for a 0.1% increase. On an annual basis, retail sales grew 5.0%, a notable slowdown from the previous month's 6.8% gain.

Meanwhile, the University of Michigan's preliminary consumer sentiment index for August fell from 55.2 to 51, further confirming a weakening in consumer confidence. This follows earlier soft signals from CPI and PPI data, marking another round of weakness in US economic releases.

The CME FedWatch tool indicates the market's implied probability of a Fed rate hike in September has fallen to around 33%, although pricing for at least one rate increase by the end of the year remains around 65%. The resulting dollar weakness has provided a boost for gold, which is priced in the US currency.

Persistent geopolitical risks create dollar safe-haven demand, limiting gold's rally

Despite the dollar's softer tone, gold's upward trajectory has been checked. US Treasury Secretary Bessent stated that the US is preparing to impose "unprecedented" economic sanctions on Iran, possibly as early as this week. Former President Donald Trump indicated he would soon declare the Strait of Hormuz as "US territory."

Iranian Foreign Minister Araghchi responded that the US must agree to Iran's conditions before shipping through the waterway can resume, adding that "no negotiations are currently taking place."

Furthermore, a new wave of Ukrainian attacks on Russian refineries continues to support oil prices, keeping inflation concerns and expectations for at least one Fed rate hike in 2026 alive. These geopolitical risks have generated safe-haven flows into the dollar, limiting its downside and thereby tempering gold's upside potential.

Institutional views

In a recent research note, HSBC revised its 2026 average gold price forecast down from $4,864 to $4,560 per ounce, but maintained its year-end target of $4,750 and its 2027 target of $5,025. The 2028 and 2029 targets remain at $5,200 and $5,300, respectively.

The bank's chief precious metals analyst noted that while the near-term average forecast has been lowered due to Fed policy and fund flow dynamics, the year-end and longer-term targets remain unchanged, reflecting confidence in central bank purchases and structural demand. HSBC believes gold still has medium-to-long-term upside potential, with policy and geopolitical uncertainty continuing to support its safe-haven appeal. If the Fed maintains higher interest rates for an extended period, gold's upward momentum could slow; however, if rate-cut expectations re-emerge or central bank buying accelerates, the probability of a move toward the $4,750 year-end target increases.

UBS views gold as still supported by macroeconomic factors, fund flows, and portfolio diversification needs. Falling US Treasury yields, a potentially weaker dollar, and continued central bank buying are expected to provide momentum for the metal. UBS advises distinguishing between short-term trading risks and long-term allocation logic, suggesting that a pullback in gold prices below $4,000 could represent a potential strategic entry window. While the market is still digesting hawkish Fed signals, the long-term bullish case remains intact. The bank expects gold to gradually recover, with a potential break above $5,000 in the first half of 2027.

Summary

Overall, spot gold is currently caught in a tug-of-war between two opposing forces. On one hand, a broad-based weakening of US economic data—including an unexpected drop in retail sales, declining consumer confidence, and cooling inflation—has diminished expectations for a Fed rate hike, putting pressure on the dollar and providing support for gold.

On the other hand, ongoing geopolitical tensions in the Middle East, intensifying US sanctions on Iran, and the unresolved Strait of Hormuz standoff are generating safe-haven demand for the dollar, which in turn limits gold's upside potential.

Market attention is now shifting to Thursday's FOMC meeting minutes for further clues on the Fed's future policy path. The short-term bullish bias for gold remains intact, but the risk of chasing prices above $4,400 has increased. A pullback toward the $4,290-$4,154 zone could attract buying interest.

As of 15:50 Beijing time on August 17, spot gold was trading at $4,408.79 per ounce.